By Ryan C. Wood
The issue here may not be readily apparent. So let us add some facts and context. A limited liability company is formed under state law and in this case there are multiple owners of the limited liability company with one managing member. Can the managing member choose to file bankruptcy for the limited liability company without the unanimous consent of all owners of the limited liability company? The answer lies with state law and the language of the LLC’s operating agreement. If the LLC is only owned by one party of course there can be no issue.
This issue recently was addressed by the Ninth Circuit Bankruptcy Appellate Panel. The bankruptcy court found that SSRE’s manager, the managing member, lacked authority to file the Chapter 11 bankruptcy petition for SSRE Holdings, LLC.
See In re SSRE Holdings, LLC v. ZIRKLE GROUP, LLC; PMC FINANCIAL; Bk. No. 2:21-bk-10327-WB; BAP No. CC-21-1027-SGF; August 26, 2021.
Problems arise with there are multiple owners of the LLC and then the managing member chooses to file bankruptcy for the LLC without the consent of the other owners. Did or does the managing member of the LLC have the legal authority to sign, authorize and be the responsible individual for the LLC’s bankruptcy case? Here SSRE Holdings, LLC, filed for relief under Chapter 11 Sub-Chapter V of the Bankruptcy Code to reorganize the LLC’s debts.
Zirkle Group, LLC, Files Motion to Dismiss Chapter 11 Petition
Upon the Chapter 11 bankruptcy filing of SSRE Holdings, LLC, Zirkle Group, LLC, filed a Motion to Dismiss the Chapter 11 case. Zirkle Group, LLC, argued the managing member of SSRE Holdings, LLC lacked authority to authorize the bankruptcy filing. Their bankruptcy attorneys argued Zirkle Group, LLC, was still a 50% owner of SRRE Holdings, LLC, and regardless, the operating agreement of SSRE Holdings, LLC, did not allow the managing member to file a bankruptcy case given the filing bankruptcy is not within the ordinary course of business.
Basic Facts of This Case
It appears the managing member of SSRE Holdings, LLC, in good faith signed and filed the Chapter 11 petition on behalf of SSRE Holdings, LLC. Zirkle Group, LLC, and SSRE Holdings, LLC, entered into a rescission agreement regarding Zirkle Group, LLC’s 50% ownership of SRRE Holdings, LLC. It was unclear whether the rescission agreement was effective or not and no Court of law had weighed in yet. SSRE Holdings, LLC, attempted to perform under the rescission agreement, but it was only part performance. The question of whether Zirkle Group, LLC, still had a 50% ownership of SSRE Holdings, LLC, at the time of filing is unclear. When the managing member of SSRE Holdings, LLC, and its bankruptcy attorneys filed for bankruptcy protection their belief was Zirkle Group, LLC, no longer was an owner requiring their consent to file. The lower Bankruptcy Court held this was not the case and the managing member lacked authority to file the Chapter 11 bankruptcy case for SRRE Holdings, LLC. The rescission agreement was ineffective and held:
- Zirkle Group, LLC held a 50% membership interest in SSRE Holdings, LLC;
- Zirkle Group, LLC did not consent to the bankruptcy filing; and
- Consent of all its members was required for SSRE Holdings, LLC, to file bankruptcy.
State Law and Manager Authority
Did the sole managing member of SSRE Holdings, LLC, have authority under the operating agreement and applicable state law to authorize the bankruptcy filing? The answer in this case was no. See Cal. Corp. Code §§ 17701.10, 17701.11, 17704.07, 17710.01). See also Sino Clean Energy, Inc. v. Seiden (In re Sino Clean Energy, Inc.), 901 F.3d 1139, 1141 (9th Cir. 2018) (citing Price v. Gurney, 324 U.S. 100, 106-07 (1945)).
Pursuant to California’s Revised Uniform Limited Liability Company Act the consent of all members is required to take actions on behalf of the company (LLC) outside the ordinary course of business. See Cal. Corp. Code § 17704.07(b)(4), (c)(4). SSRE Holdings, LLC’s, operating agreement provides:
Sections 4.1 and 4.2 of the SSRE Operating Agreement address the authority conferred upon the manager of SSRE. Section 4.1 provides: 4.1 Management and Powers. The business, property and affairs of the Company shall be managed by “XXXX XXXX” (the “Manager”). Accordingly, unless otherwise limited by the Articles or this Agreement, the Manager shall have full, complete and exclusive authority, powers and discretion to manage and control the business, property and affairs of the Company, to make all decisions regarding those matters and perform any and all other acts or activities customary or incident to the management of the Company’s business, property and affairs. Section 4.2 even confirms the broad grant of authority to the manger by declaring that it is “the intent of the Agreement that no limitations be placed on the powers of the Manager.”
This languages appears to be far reaching and encompasses any and all business of the LLC, including the authorization and filing of a bankruptcy petition. Naturally this language was used by both parties to argue Sections 4.1 and 4.2 supported their arguments. So how did, “the intent of the Agreement that no limitations be placed on the powers of the Manager” get ignored or interpreted in the opposite manner as the plain unambiguous language of the operating agreement?
The Ninth Circuit Bankruptcy Appellate Panel held the operating agreement does not specifically require consent of all members to file bankruptcy.
In re Lexington Hosp. Grp., LLC, 577 B.R. 676, 686 (Bankr. E.D. Ky. 2017) (construing broad grant of authority under operating agreement to include filing bankruptcy petition)
In re E. End Dev., LLC, 491 B.R. 633, 635-36 (Bankr. E.D.N.Y. 2013) (same); but cf. In re Avalon Hotel Partners, LLC, 302 B.R. 377, 380 (Bankr. D. Or. 2003) (holding that the filing of bankruptcy fell within a non-exclusive category of major decisions that required the consent of all members under LLC’s operating agreement).
The Ninth Circuit Bankruptcy Appellate Panel held SSRR Holding, LLC’s, Operating Agreement was not silent as to the manager’s authority, and California’s statutory default rule concerning decisions outside the ordinary course, Cal. Corp. Code § 17704.07(c)(4)(B), does not apply. In short, sections 4.1 and 4.2 of the Operating Agreement implicitly granted Wetch as manager the authority to file bankruptcy for SSRE.
There does not have to be a specific reference to filing bankruptcy in the operating agreement of a limited liability company. The broad general authority conferred by the language of the operating agreement and California law is enough to provide authorization for a managing member to file bankruptcy for the limited liability company.
Rescission of Agreement
SSRE Holdings, LLC, argues Zirkle Group, LLC, no longer had a 50% interest in SSRE Holdings, LLC, due to the rescission agreement they entered into transferring back the 50% interest. Accordingly SSRE Holdings, LLC, does not need Zirkle Group, LLC’s consent to file bankruptcy.
Did one or both parties breach the rescission agreement?
See Whitney Inv. Co. v. Westview Dev. Co., 273 Cal. App. 2d 594, 602 (1969) (“A breach does not terminate a contract as a matter of course but is a ground for termination at the option of the injured party”); see also Alder v. Drudis, 30 Cal. 2d 372, 381 (1947) (stating that a party injured by a breach of contract may, by election, treat the contract as rescinded).
First the Ninth Cir. BAP determines the rescission agreement is unilateral agreement supported by consideration and that the rescission agreement was in force and full effect despite various technical breaches of the rescission agreement.
The plain and unambiguous language of the rescission agreement is clear that Zirkle Group, LLC, released its interest in SSRE Holdings, LLC, effective immediately upon execution of the rescission agreement, even though the $30,000.00 payment required to be paid by SSRE Holdings, LLC, had not yet been paid. The rescission agreement was, therefore, a valid, enforceable contract binding SSRE Holdings, LLC, and Zirkle Group, LLC. If the language of the rescission agreement did not include the immediate release of the Zirkle Group, LLC, 50% interest the outcome here should be the opposite.
